VA and the Problem of Old Properties

A century and a half ago, after the Civil War had ended, the federal government began an ambitious program of building national hospitals for wounded veterans—a few at first, and then, as those veterans became elderly, many more of them.

One, in Milwaukee, went up in 1881 and did good service for years until, in the end, the facilities became too old to use—but, as the New York Times recently reported, “too grand to demolish.” The result is an albatross whose doors have been closed for three decades, one of at least 200 Department of Veterans Affairs (VA) structures that are more than 90 years old—and one of at least 430 VA-owned properties that now sit empty.

Can these buildings be repurposed, instead of maintained—barely, at that—at a cost of more than $7 million a year? That’s a problem that VA Secretary David J. Shulkin has been wrestling with since coming into office with the charge of trimming costs and streamlining operations. In June, without much fanfare, he announced a plan to dispose of all such vacant buildings within two years, either by disposing of them or taking a wreckers’ ball to them. “We owe it to the American taxpayer to apply as much of our funding as possible to helping veterans,” Shulkin remarked, adding, “maintaining vacant buildings … makes no sense.”

Adding to this program will be a comprehensive review of another 784 underutilized VA buildings, with an overall goal of freezing the agency’s real property footprint through a variety of strategies, including telecommuting and freeing space by digitizing paper files. One interesting wrinkle is that the agency may lease more space than it now does rather than own its properties outright. In all, Shulkin projects that these actions will cut annual costs by $23 million, beginning this year, when 71 buildings are scheduled for disposal.

In some instances, the Times story notes, the VA sits on the horns of a dilemma. A vacant old building does no one any good just sitting unoccupied, and it costs money to keep it up—a single theater on the Milwaukee campus a total of more than $3 million just to repair leaking old windows and repair the roof. By the same token, these well-built structures aren’t easy to take down, and it may cost more to do so than maintaining them. In either instance, the buildings cost the VA money it does not have.

In such cases, public/private partnerships may relieve some of the department’s burden. In Milwaukee, a local developer that specialized in historic renovation leased the VA Hospital’s Old Main, which had been registered as a historic landmark. At a cost of $33 million, with no direct cost to the VA, the company will convert Old Main and five other structures into apartments for homeless veterans.

This creative solution falls easily within the three channels available to the VA for disposing of unwanted property: to repurpose it for a third party to use, often by leasing; to sell or otherwise transfer the property to a third party outright; or simply to demolish the property. Land developers note that in the case of many older buildings where there are no formal historic-landmark or similar protections, the best use is often to scrape the structure and use the land for something else. Others note, however, that the “bones” of these old buildings are solid, with far more character than most modern buildings, making repurposing an attractive prospect, though some buildings will require expensive gutting, removal of asbestos and other toxic materials, and the like.

There are opportunities for private investors in the VA plan. However, according to the federal procedures the plan must follow, the right of first refusal for any properties designated as excess goes to other federal agencies. If the property finds no takers, then its status shifts to surplus, giving first priority to public improvement projects—a homeless shelter, say, or community food bank. State, local, and municipal governments are then given preference. Only after all options have been explored can properties be offered for public sale, with, again, the likeliest use for private use being to clear the land and build something else.

Plenty of other federal agencies own unused, vacant, and decrepit properties. The VA is not alone. But, say agency officials, the VA can show the way to a more vigorous program of disposing of unneeded federal holdings. Says Shulkin, “We’re working as quickly as possible to get them out of our inventory.”

Kurt Stout is the national leader of Colliers International’s Government Solutions practice group, which provides government real estate services to private investors and federal agencies. He also writes about federal real estate on his Capitol Markets team blog. You can contact Kurt by email or on Twitter.